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Are fears about the stock market’s valuation justified or is the market climbing a wall of worry? If it was a burning question back in December 2012, when Richard Bernstein, a former chief investment strategist at Merrill Lynch and now strategist at his eponymous advisory business, issued his well-known report with his answer, it’s a raging conflagration today.

Two and a half years ago, after analyzing four market indicators, Bernstein—who had irritated his bullish peers in the 2000s by being famously pessimistic leading into the crash and the Great Recession—concluded that the bull market was intact. With the Standard & Poor’s 500-stock index up some 50 percent since then, and U.S. Federal Reserve Chair Janet Yellen warning just last week that stocks and bonds are richly valued, we asked Bernstein to revisit his 2012 analysis to see what it says about the market now.

The Wall Street Sentiment Indicator

Bernstein, who has tracked the consensus recommended asset allocations of Wall Street strategists for almost 30 years, says they’re a reliable contrary indicator. He compares the consensus equity allocation for a balanced fund—which splits assets between equities (U.S. and international), bonds, and cash—to the typical long-term recommended equity weighting of 60 percent to 65 percent for such funds. (See the chart below.)

December 2012: Strategists recommended the lowest equity allocation since Bernstein had tracked the data—about 44 percent in equities. “At no time in this bull market have they suggested overweighting equities,” says Bernstein. He was recommending 65 percent to 75 percent in equities in moderate portfolios.

Now: The consensus still shows an underweight in equities, he says, although it’s less extreme, at 52 percent. Bernstein’s recommended weighting, meanwhile, has slid to about 60 percent, with a 35 percent exposure to U.S. equities. That’s down from an 85 percent exposure to U.S. equities several years ago, he says.

ISI Bond Manager Survey:

The Treasury market climbs a wall of worry, too, says Bernstein. To measure whether that fear is overdone, he looks at a survey of weekly bond manager portfolios from Evercore ISI (which was ISI Group in 2012). He wants to see the percentage of managers who say the duration of their portfolio is longer than that of their benchmark index—in this case, the 10-year Treasury note.

Duration measures how sensitive a portfolio is to a rise or fall in interest rates. If duration is shorter than the benchmark, it means managers expect interest rates to rise, and vice-versa.

December 2012: Bond managers kept their duration shorter than the benchmark, so were positioned for rising rates. “Bond managers have never in the history of the survey positioned for falling interest rates,” wrote Bernstein. His view was that rates would keep falling.

Now: Earlier this year, duration in the survey hit an all- time low. Managers have lengthened durations recently but the level is still among the lowest since 2006. “It’s kind of funny because as they did that, rates went up,” says Bernstein. What does it mean? Not that much, except that it continues to be a somewhat contrary indicator, he says.

Investment Flows:

If there’s a stretch of time that mutual fund flows into equities presaged a bear market, Bernstein says he hasn’t found it. What he’s found suggests that big inflows into equity mutual funds are a warning sign and that big outflows signal the opposite.

December 2012: Fund investors were selling U.S. equities as the S&P 500 returned about 15 percent. “Significant outflows suggest opportunity,” wrote Bernstein.

Now: Bernstein points to April 20 TrimTabs data showing that the trailing four-week outflow in U.S. equity exchange- traded funds stood at $27.6 billion, or 2.3 percent of all assets. That was the seventh-highest reading on record and, according to the report, an “extremely bullish short-term contrarian signal for U.S. equities.” Bernstein agrees, but he thinks it’s more than a short-term signal.

Fears of Inflation:

Bernstein likes to compare actual inflation against expectations “to show how habitually afraid people are of inflation.”

December 2012: The risk of meaningful inflation was “quite low,” Bernstein figured. But investors were factoring inflation of about 6 percent into stock market valuations over the next 12 months, his models showed.

Now: Inflation hasn’t been a problem since Bernstein wrote his report. His model shows investors pricing about 3 percent inflation into valuations, which he thinks is too high.

With oil plunging, then coming back to life, inflation fears may be a little more merited today, he says. If so, he says it’s based on the price of oil, not on broader inflation in the economy.

Bernstein’s Bottom Line

The strategist has been bullish for about five years and remains so. He does say the bull market is in the sixth inning and will enter the seventh if the Federal Reserve raises interest rates. “The beauty of making a baseball analogy,” Bernstein notes, “is that there’s no clock—a late stage of a bull market cycle can go on for a while.”

While predicting the level of the S&P 500 is something Bernstein’s happy not to have to do, he hazards one forecast. It stems from his belief that investors are taking on far more risk in fixed-income than they realize. “I’d bet that at the peak of the bull market, octogenarians will be seeking capital appreciation and not income,” he says. “They’ll think it’s a safer bet.”

To contact the author on this story: Suzanne Woolley at swoolley2@bloomberg.net

To contact the editor on this story: Tracy Alloway at talloway@bloomberg.net

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